The Wall Street Journal and the UK's Times Online are reporting that KPMG are facing criminal charges, obstructing justice ("allegedly misleading Revenue investigators and concealing evidence") and selling "abusive" tax shelters and are currently negotiating with Federal prosecutors:

Citing lawyers briefed on the case, the Journal claims that the issue of whether to charge KPMG has sparked a debate among top officials at the US Department of Justice. The newspaper reported this morning that indicting KPMG would put future of the company at risk.

The threat of these criminal charges could persuade KPMG to pay "substantial financial penalties" in settlement, the Journal wrote.

They paid $22.5 million to the SEC in April, to settle charges it allowed Xerox to "manipulate its accounts." And last year KPMG was censured by the SEC for "improper professional conduct" in connection with work it did for Gemstar-TV Guide International Inc.

According to the WSJ, negotiations are typical in such cases:

Under unwritten Justice Department policy, companies facing possible criminal charges often are permitted to plead their case to higher-ups in the department. These officials are expected to take into account the strength of evidence in the case -- the culmination of a long-running investigation -- and any mitigating factors, as well as broader policy issues posed by the possible loss of the firm. . . .

To avoid the possible loss of another big accounting firm, Justice Department options include seeking some other resolution of the case. One possibility is the deferred-prosecution agreement, which has become increasingly common in the past year and often is preceded by threats to seek indictment of a firm. Under these deals, a company avoids a criminal trial in exchange for agreeing to extraordinary oversight, sweeping changes in business practices and often a big fine.

William Mateja, a former Justice Department official who coordinated white-collar-crime enforcement, said prosecutors must often weigh factors beyond the evidence. "In light of the Andersen case, the department is going to be extremely careful about any decision to indict a company like KPMG, realizing the huge ramifications -- the practical, economic and social fallout."

If you are a WSJ subscriber, you can read an article explaining deferred prosecution agreements and you can read the KPMG statement.

Out of fairness to them, I will tell you what it says: that the Department of Justice has been investigating certain tax services offered by the firm during the years 1996-2002, as part of "a larger tax shelter investigation into the role of accounting firms, law firms, large banks and taxpayers who participated in the development, promotion and implementation of tax shelters." KPMG no longer offers the services, they've "separated from the firm" those that did it, and they have made other reforms. "KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred." They remain in discussions with the DOJ and "continue to cooperate fully in its investigation."

In one of those quirks of fate, the KPMG statement page has a Xerox ad.